Anand Rathi ResearchDFM FoodsA l h i d k k i i i i h B

DFM is a niche player, focused on ready-to-eat snacks for children. Over FY1993-

A play on the growing ready-to-eat snacks market; we initiate coverage with a Buy

Rating: Buy s a c e p aye , ocused o eady to eat s ac s o c d e O e 993

2013 this segment has exhibited a 15% CAGR.

Increase in ad-spend over FY09-13 from 4.3% of net sales to 4.6% has helped thecompany improve pricing power and thus the EBITDA margin from 5% to 9.3%

Ke data DFM IN / DFM BO

Target Price: `460

Share Price: `289

p y p p g p g

It has aggressive plans to expand its distribution network. It plans to expand retailoutlets to 0.4m by end-FY16, from 0.2m in FY13. It also plans to expand distribution

over FY15-16 to the Canteen Stores Department, modern trade and the Railways

Key data DFM IN / DFM.BO

52-week high / low `329/ `147

Sensex / Nifty 21740/6483

3-m average volume US$0.1m p y

We initiate coverage with a Buy, and a price target of `460, at a PE of 25x FY16eKey risks. Increase in raw material prices and competitive pressures

Market cap `3bn / US$47m

Shares outstanding 10 m

Financials (YE Mar) FY12 FY13 FY14e FY15e FY16e Sales (`m) 1,692 2,250 2,722 3,266 3,920 Net profit (`m) 104 63 89 142 184

EPS (`) 10 4 6 3 8 9 14 2 18 4

Shareholding (%) Dec13 Sep'13 Jun'13

Promoters 69.0* 69.0 69.0

Foreign Institutions - - - EPS (`) 10.4 6.3 8.9 14.2 18.4

Growth (%) 24.5 (39.1) 40.3 60.3 29.5 PE (x) 27.9 45.8 32.6 20.4 15.7 PBV (x) 8.3 7.1 6.3 5.2 4.2 RoE (%) 34 4 16 7 20 5 28 0 29 8

Foreign Institutions - - -

Domestic Institutions - - -

Public 31.0 31.0 31.0RoE (%) 34.4 16.7 20.5 28.0 29.8 RoCE (%) 25.9 17.0 22.0 29.0 32.5 Dividend yield (%) 0.9 0.9 1.0 1.4 1.7 Net gearing (%) 163.8 146.9 78.7 59.5 46.7 Source: Company Anand Rathi Research

Aniruddha Joshi+9122 6626 6732

i ddh j hi1@ thi

Note West bridge acquired 25% stake in 4QFY14 from promoters.

1

Source: Company, Anand Rathi Researchaniruddhajoshi1@rathi.com

Shilpi Tapariashilpitaparia@rathi.com 21 March 2014

Anand Rathi ResearchDFM Foods: Financials

Fig 1 Income statement (` m)Year-end: Mar FY12 FY13 FY14e FY15e FY16eNet sales 1,692 2,250 2,722 3,266 3,920

Fig 2 Balance sheet (` m)Year-end: Mar FY12 FY13 FY14e FY15e FY16eShare capital 100 100 100 100 100

Sales growth (%) 41.2 33.0 21.0 20.0 20.0 - Op. expenses 1,494 2,040 2,467 2,954 3,537 EBIDTA 198 209 254 312 382 EBITDA margins (%) 11.7 9.3 9.3 9.5 9.7 - Interest 45 94 75 45 43 - Depreciation 24 44 50 56 65

Reserves & surpluses 202 236 289 385 511 Shareholders funds 302 336 389 485 611 Minority interests - - - - -Debt 583 613 388 368 348 Deferred tax liability 47 70 70 70 70 Capital employed 932 1 018 847 922 1 028- Depreciation 24 44 50 56 65

+ Other income 30 29 6 7 9 - Tax 56 37 48 76 99 Income tax rate 34.9 37.2 35.0 35.0 35.0 PAT 104 63 89 142 184 Extraordinary items - - - - -

Capital employed 932 1,018 847 922 1,028 Fixed assets 885 974 1,024 1,148 1,333 Investments - - - - -of which, Liquid - - - - -Working capital (19) (8) (239) (299) (371)Cash 11 17 26 37 30

Minority Interest - - - - -Adjusted PAT 104 63 89 142 184 FDEPS (`/sh) 10.4 6.3 8.9 14.2 18.4 FDEPS growth (%) 24.5 (39.1) 40.3 60.3 29.5 Source: Company, Anand Rathi Research

Capital deployed 932 1,018 847 922 1,028 Net Debt 619 665 431 400 387 W C turn (%) (1.1) (0.4) (8.8) (9.2) (9.5)Book value (`/sh) 34.9 40.5 45.9 55.5 68.0 Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement (`m)Year-end: Mar FY12 FY13 FY14e FY15e FY16eConsolidated PAT 104 63 89 142 184 +Depreciation 24 44 50 56 65 Cash profit 156 124 138 198 249 - Incr./(Decr.) in WC 5 9 231 60 72

Fig 4 Ratio analysis @ `289Year-end: Mar FY12 FY13 FY14e FY15e FY16eP/E (x) 27.9 45.8 32.6 20.4 15.7P/B (x) 8.3 7.1 6.3 5.2 4.2EV/sales (x) 2.1 1.5 1.3 1.1 0.9EV/EBITDA (x) 17 6 16 7 13 7 11 2 9 1Incr./(Decr.) in WC 5 9 231 60 72

Operating cash-flow 161 134 369 257 321 -Capex (553) (132) (100) (180) (250)Free cash-flow (391) 1 269 77 71 -Dividend (23) (29) (35) (46) (58)+ Equity raised - - - - -

D b i d

EV/EBITDA (x) 17.6 16.7 13.7 11.2 9.1RoAE (%) 34.4 16.7 20.5 28.0 29.8RoACE (%) 25.9 17.0 22.0 29.0 32.5Dividend yield (%) 0.9 0.9 1.0 1.4 1.7Dividend payout (%) 24.1 39.6 33.9 28.2 27.2RM to sales (%) 63.8 63.4 63.4 63.3 63.1

+ Debt raised 470 60 (225) (20) (20)-Investments (73) (27) - - --Misc. items - - - - -Net cash-flow (18) 6 9 11 (7)+Opening cash 29 11 17 26 37 Closing cash 11 17 26 37 30

Ad spend to sales (%) 4.0 4.6 4.7 4.7 4.7EBITDA growth (%) 35.4 5.9 21.7 22.6 22.5EPS growth (%) 24.5 (39.1) 40.3 60.3 29.5PAT margin (%) 6.1 2.8 3.3 4.3 4.7FCF/EPS (%) (377.5) 2.1 303.9 54.6 38.5OCF to sales (%) 9.5 5.9 13.6 7.9 8.2

2

g 6 3 30Source: Company, Anand Rathi Research

OCF to sales (%) 9.5 5.9 13.6 7.9 8.2Source: Company, Anand Rathi Research

Anand Rathi ResearchInvestment argumentInvestment argument

Niche operator in snacks for children

Crax has strong positioning as a snack, especially for

Competitive positioning of various brands Lowest-priced snack

Brand Target customers

Crax Children

kids

Apart from niche positioning, Crax is

Lays Young customers

Kurkure Family consumption

Haldiram Family consumption

Balaji No customer preferencealso less expensive than most other snacks

Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Balaji No customer preference

Act II No customer preference

Parle No customer preference

To retain young consumers, strategy of giving free gifts (toys) in each pack

Improving ad-spend driving margin upwardStrategy of free gift a toy in each pack

(toys) in each pack

Increase in ad-spend has helped expand the EBITDA margin.the EBITDA margin. However, higher staff cost and freight cost resulted in slight drop i EBITDA i iin EBITDA margin in FY13.

Source: CompanySource: Company

3

Anand Rathi ResearchInvestment argumentInvestment argument

Widening distribution network

Healthy scope to expand distribution in east and west India

Distribution network of consumer companies Geographical revenue breakup (FY13)

With its healthy distribution-expansion strategy, we expect a 20% CAGR in revenue over FY14-16

Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Roll-out of products through institutions would also help boost revenue growth rates

Strategy to expand its distribution networkFY15e FY16erevenue growth rates FY15e FY16e

Current retail outlets: 225,000 300,000 400,000

Expansion of the distribution network

Urban West Urban West

Urban East Rural East network

Urban South

Institutional salesCanteen Stores Department Railways

Modern trade

Source: Company, Anand Rathi Research

4

Anand Rathi ResearchInvestment argumentInvestment argument

Launch of brands in a growing segment

Over FY93-13 the packaged foods segment registered a

Launch of Krunchoids in FY14 Brand-wise revenue breakup (FY13)

15% CAGR

The profit margin in packaged foods is on an upswing

If successful, Krunchoids, the new Source: Company Source: Company, Anand Rathi Researchbrand, would reduce dependence on Crax and help erase the single-product-

Huge unregulated market*- Healthy scopePackaged foods*: a growing segment

single productcompany tag

Forty percent of the snacks market issnacks market is unregulated. This offers DFM room to gain market share

Source: Company, Anand Rathi Research *Salty snacksSource: Company, Anand Rathi Research * CAGR of 15%

5

Anand Rathi ResearchInvestment argumentInvestment argument

Healthy strategy in place

The company has in place a healthy sub-segmentation

Sub-segmentation strategy Focus on price point SKUs (FY13)Crax

strategy. As brands are launched under Crax, the benefit of umbrella advertising

Corn Rings(5 variants)

Namkeen Krunchoids(4 variants)

umbrella advertising

CPI of salty snacks has recorded a healthy 12% CAGR

Source: Company, Anand Rathi Research Source: Company, Anand Rathi Researchhealthy 12% CAGR. This indicates the ability of most regulated operators

hi h

Acceptance of price hikes in salty snacksHealthy scope to expand the margin*

to pass on higher raw-material prices

Considering EBITDA i f th f dmargins of other food

companies, DFM has healthy scope to improve margins p g

Source: GoI CPI registering a 12% CAGR Source: Company, Anand Rathi Research *EBITDA margin FY13

6

Anand Rathi ResearchInvestment ArgumentInvestment Argument

Maintained gross margin despite volatile RMs

The company has maintained a ~ 35% gross margin despite

Gross margin maintained despite volatile costs Palm-oil prices

volatile raw-material prices.

Corn (maize) is the companys largest raw material

Packaging material Source: Company, Anand Rathi Research Source: Bloomberg(HDPE) and palm oil are other raw materials for DFM Foods

WPI of corn (maize)Packaging-material (HDPE) prices

Foods

Source: GoISource: RIL

7

Anand Rathi ResearchFinancialsFinancials

Financial overview

We expect a 20% CAGR in revenue, mainly driven by a

Expect a 20% CAGR in revenue over FY14-16 Margin to be steady, at ~10%

15% CAGR in volume over FY13-16

We expect the EBITDA margin to be steady over FY14-16

We expect PAT to Source: Company, Anand Rathi Research Source: Company, Anand Rathi Researchrecord a 44% CAGR, driven by healthy revenue growth and debt repayment

Healthy return ratiosPAT to see a 44% CAGR over FY14-16

debt repayment

Over FY14-16, we expect the company to see healthy returnto see healthy return ratios (more than 20%)

Source: Company, Anand Rathi ResearchSource: Company, Anand Rathi Research

8

Anand Rathi ResearchValuationValuation

Valuation

After a weaker FY13, multiples have expanded because of

PE band Mean PE (x) and Standard deviation

a better FY14

The stock is quoting slightly above its mean PE of the past five years

It trades at a discount Source: Company, Anand Rathi Research Source: Company, Anand Rathi Researchto other food companies despite its better growth rates and comparable

Relative valuationand comparable return ratios

Risks. Higher raw material prices and

Price M.Cap RoE (%) RoCE (%) CAGR FY13-15 (%) PE (x) Div Yield

Company (`) (`m) FY14e FY15e FY14e FY15e Revenue EPS FY14e FY15e FY14e (%)

DFM Foods 289 2,890 20.5 28.0 22.0 29.0 20.5 50.0 32.6 20.4 1.0

Nestle 4,820 464,648 49.9 48.2 35.7 37.9 12.9 14.6 41.0 32.1 1.0 material prices and increase in competitive pressure

GSK Consumer 4,261 179,388 34.9 34.4 29.6 30.8 17.8 16.8 35.6 30.1 1.4

Britannia Industries 850 102,000 57.9 48.1 50.9 50.3 16.2 42.8 24.9 21.3 1.2

Agro Tech 473 11,541 17.0 19.2 21.5 24.3 9.4 19.1 25.7 19.4 0.5

Zydus Wellness 495 19,305 37.1 34.2 34.1 31.0 15.9 18.0 17.2 14.3 1.6

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Source: Company, Anand Rathi Research

Anand Rathi ResearchValuationValuation

Discounted cash-flow (DCF)

Discounted-cash-flow valuation(` m) FY14e FY15e FY16e FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25eNet sales 2,722 3,266 3,920 4,703 5,644 6,773 8,128 9,753 11,704 14,044 16,853 20,224 Growth in revenues (%) 21.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0

At a 7% terminal growth rate and a 12.5% discount rate, ( )

EBITDA margin (%) 9.3 9.5 9.7 9.7 9.7 9.7 9.7 9.7 9.7 9.7 9.7 9.7 EBITDA 254 312 382 456 547 657 788 946 1,135 1,362 1,635 1,962 Depreciation 50 56 65 78 94 113 135 162 195 234 280 336 Other income 6 7 9 10 13 15 18 22 26 31 38 45 Interest expenses 75 45 43 18 - - - - - - - -PBT 136 218 283 371 466 559 671 806 967 1 160 1 392 1 670

the value per share works out to `473

We expect the PBT 136 218 283 371 466 559 671 806 967 1,160 1,392 1,670 Income taxes 48 76 99 115 145 173 208 250 300 360 432 518 PAT 89 142 184 256 322 386 463 556 667 800 961 1,153

Increase in working capital 231 60 72 76 98 109 131 157 188 226 271 325 Capex (100) (180) (250) (300) (360) (432) (518) (622) (746) (896) (1,075) (1,290)F h fl 269 77 71 110 153 176 211 253 303 364 437 524

company to maintain growth rates of 20% over the next decade as well as a 9 7% Free -cash-flows 269 77 71 110 153 176 211 253 303 364 437 524

Discounted free-cash-flows 1,197

Terminal growth rate (%) 7 Terminal value 10,199

as well as a 9.7% EBITDA margin

Repayment of debt, negative working

Discounted terminal value 3,533

Net value to shareholders 4,730

No. of shares (m) 10

negative working capital and limited capex are expected to drive the strong f h fl Value per share (`) 473

Discounting factors (%)Risk-free-rate 9.0 Beta (x) 0.7 Market ret rn 14 0

free-cash-flow generation

Source: Company, Anand Rathi Research 10

Market return 14.0 Cost of equity 12.5

Anand Rathi ResearchCompany backgroundBusinessBusiness

Company background Promoters and Management

DFM Foods has been manufacturing andmarketing packaged foods since 1984

Its key brands are Crax and Natkhat It has

DFM Foods is a 44% subsidiary of Delhi FlourMills and the Mohit Jain family. In Q4 FY14,Westbridge acquired a 24.9% stake in DFM

Its key brands are Crax and Natkhat. It hasrecently introduced Krunchiods and will continueto introduce new products / brands in the snackssegment

Foods

Chairman: Mohit Jain looks after overall strategyand business administrationsegment

The manufacturing units are at Noida and Delhi

W ll t bli h d i th I di d i i th

and business administration

Managing Director: Rohan Jain is responsible forday-to-day operations and looks after sales &

Well established in north India and is in theprocess of expanding its distribution network toeast and west India

y y pmarketing

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Anand Rathi ResearchAppendix

A l C ifi iAnalyst Certification

The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectlyrelated to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities andExchange Board of India (hereinafter SEBI) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they havegiven in the Research Report.The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback,stock picking competitive factors firm revenues and overall investment banking revenuesstock picking, competitive factors, firm revenues and overall investment banking revenues.

Anand Rathi Ratings Definitions

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